Private credit has reshaped not only the dental industry but nearly every facet of U.S. life. Longtime certified public accountant and business valuation analyst Bruce Bryen has advised thousands of dentists on business financial strategies, including selling their practice.
As interest rates climb (and other concerns surface about private credit), incentives for selling to dental service organizations (DSOs) are shrinking, which means a model that once promised freedom from administrative burdens necessitates that dentists adopt a more strategic approach, says Bryen.
Whether you’re a dentist who’s selling, staying, or trying to figure out your next steps, Bryen offers his observations about the current market and what dentists can do today to prepare for a secure retirement.
Does private credit in dentistry worry you?
Bruce Bryen, CPA, CVA.
I started working with dental service organizations back in the 1970s and early '80s, and I thought the concept was a great one. Nearly every dentist I've worked with -- and I've worked with over 1,000, between accounting services, valuations, and testifying in court -- hates administrative work. So, for them, the DSO model was incredibly helpful. It also consolidated purchasing power, making product costs cheaper. And for early participants, the upside was real: As additional practices joined over time, those early dentists gained value from the growth of the whole network.
The problem was sustainability. In the 1970s and '80s, a lot of DSOs failed. Today's DSOs are stronger than those early ones, but now, with interest rates higher than they were a few years ago, there's less cash flow available. DSOs can't offer the same incentives they could when money was cheaper and more readily available.
Are DSOs still a good option for a dentist looking to sell?
For a solo practitioner or a small partnership of two or three dentists, the traditional sale model is starting to look more attractive again, because DSOs simply can't deliver what they once promised. When you're borrowing at 3%, you have a certain budget. At 5%, that budget shrinks, and so does what you can offer the selling dentist.
There is a new wave, though: Orthodontic practices are increasingly entering similar arrangements -- they're forming what are being called OSOs. Orthodontists are just as frustrated with administrative work as general dentists are.
For some of my clients who wanted to join a DSO, I've posed another question: Why not hire a skilled business manager yourself -- someone who handles the hiring, the insurance billing, the administrative grind -- rather than selling your practice entirely? You keep ownership and control.
Are you concerned about DSOs becoming insolvent?
Not insolvent but struggling to deliver on their promises. Are today's DSOs as vulnerable as the ones that collapsed in the '70s and '80s? No. They're considerably stronger and could weather significant trouble. But they are getting hit hard by current market rates.
There's another dynamic at play: Dentists are used to being in control. Even the ones who hate the business side are still high earners, and a lot of what happens when selling to a DSO is that the salaries are cut substantially.
I think rates will come down, but I don't see DSOs becoming insolvent.
For a dentist who's in negotiations with a PE-backed DSO, what would you advise?
My advice would be to stretch it out a little bit, because what you're going to get today isn't going to be as good as what the initial dentist got. Rates were lower then, budgets were better, and payouts were larger. If you're negotiating now, take your time. Keep the conversation going, but don't rush to close. Wait for the market to shift in your favor, and [then] you've got a chance to get a big killing later on.
For a dentist who has already sold to a DSO and is watching interest rates climb, what would you advise them?
Be patient. The payouts you were counting on are going to be hard to achieve in this environment. It's going to be next to impossible. So, keep your nose to the grindstone. Be patient. And because there are typically significant penalties for early exit, leaving isn't a practical option for most people. So I would say be patient, keep producing, and wait it out. The alternative -- focusing on what you can't change -- will only depress you.
Are practice valuations holding up, or are you seeing decreases?
They're lower. And deals are harder to put together, because interest rates are such a fundamental driver of valuation. When rates rise, values fall -- that's basic math. Lenders are still active; they like dentists because dentists are considered safe credit risks.
But there has to be creativity in structuring deals now -- higher ongoing compensation, deferred payments, built-in retirement benefits for the seller. These aren't just perks; they protect both parties and reduce the upfront cash burden on the buyer.
What about newer dentists saddled with student debt and older dentists who don’t want to sell to a DSO? What might be a good solution?
Younger dentists tend to like the DSO model. The compensation is often higher than what they'd earn buying a small practice, and they avoid the administrative headache entirely. They can leave at the end of their clinical day. That trade-off works well for them.
For older dentists, the calculation is different. The challenge is that many didn't prioritize retirement savings when they were younger, and now they're looking at a practice that's worth less than they expected. My advice is to start now, aggressively.
A well-structured retirement plan -- not a standard contribution plan but a highly funded defined benefit or nonqualified plan designed for a high earner -- allows a dentist to put away $150,000 to $200,000 a year in the final years before retirement.
I've used this strategy with clients for 15 years. One orthodontist I worked with was told by past advisers that he could only put a couple thousand a year into a plan while paying an enormous tax bill. We restructured his plan so he was sheltering $200,000 annually. He retired comfortably.
If you're an older dentist who's frustrated the market didn't deliver what you hoped, take control of what you can. Hire an adviser who will help you build the retirement you need. If you wait for someone else to deliver it, you may be waiting a long time.
Bruce Bryen is a certified public accountant with more than 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
